Fw: Investor's Eye: Update - Sun Pharmaceutical Industries, Eros International, Insurance

 

 

Investor's Eye [July 11, 2013]  Sharekhan www.sharekhan.com

Summary of Contents   < /font>   STOCK UPDATE Sun Pharmaceutical Industries Recommendation: Buy Price target: Rs1,190 Current market price: Rs1,095 Price target revised to Rs1,190; maintain Buy  Key points Sun Pharma to gain from shortage of Doxycycline in US market: Anti-biotic drug Doxycycline is one of the drugs listed under the shortage category in the USA. Recently, Hikma Pharmaceuticals (Hikma) has revised its revenue forecast showing that Doxycycline will add at least $100 million of incremental revenue with a potential gain of $60 million in the incremental profits. This has relevance for Sun Pharmaceutical Industries (Sun Pharma) as it also becomes one of the suppliers for Doxycycline after acquiring the generic business of URL Pharma in the USA. Last quarter, URL Pharma had taken a price hike for Doxycycline in the USA, following the shortage of drugs, while Hikma's production of Doxycycline was halted due to a warning letter by the US Food and Drug Administration (USFDA). Though Hikma's production of Doxycycline is normalised now and therefore it hopes to gain significantly from this drug, Sun Pharma is also expected to gain both in terms of revenues and healthy margin. We can expect nearly $60-80 million (we have built in $80 million) revenues from this product with the operating profit margin (OPM) at approximately 50 % in FY2014. Doxycycline will make up for the loss related to Lipodox/Doxil: Sun Pharma has got an opportunity to supply Doxil (liposomal doxorubicin, sold as Lipodox by Sun Pharma) in the USA during FY2013 after getting fast-track approvals from the USFDA due to shortage of drugs. We estimated nearly $250 million of revenues from this product with a very high margin due to limited competition. However, since the resumption of supplies by innovator Janssen Pharmaceuticals (Janssen Pharma) and generic approvals in February 2013, Sun Pharma has started losing market share in Lipodox. Based on the retail sales data (in US dollar terms) for May 2013, the market share of Sun Pharma's Lipodox declined by 14% month on month (MoM; market share stood at 16.1%). However, the generic version of Lipodox recorded a market share of 32.7% (up 17.7 basis points MoM). We believe Sun Pharma would lose more on the margin front due to increased competition in Lipodox. However, with the ramp-up in Doxycycline, Sun Pharma would be able to materially make up for the loss related to Lipodox. We have revised earnings estimates and price target: We have revised our earnings estimates upwards by 12.9% and 3.5% for FY2014 and FY2015 to factor the upside from Doxycycline and currency benefits. Accordingly, our price target gets revised up by 6% to Rs1,190 (which implies 26x estimate earnings per share [EPS] of FY2015). We maintain Buy rating on the stock.   Eros International Recommendation: Buy Price target: Rs240 Current market price: Rs139 Better days ahead  We recently met Mr. Kamal Jain, group chief financial officer of Eros International Media Ltd (EIML), to discuss the current state of the business environment and the future outlook. The management indicated that FY2014E would be better for the earnings performance after a soft performance in FY2013 (when EIML's revenues had grown by 13% and net profit had grown by 4.7%). The optimism was driven by some big-ticket releases in FY2014E ("Kochadaiyaan", "Ram Leela" and "Rambo Rajkumar" among others) coupled with the company's proven track record of making high-margin low-budget movies (recent success "Raanjhanaa", coming up "Bajate Raho").  It further shared that better monetisation of the movie slate and HBO partnership is expected to aid margin improvement (the HBO deal has the potential net profit margin of 80%). The progress on the HBO partnership has been on expected lines and the deal is expected to contribute around Rs3-4 crore of revenues in FY2014E. On the Q1FY2014 performance, the management said that the revenue and earnings growth would be driven by a much better than expected performance by the company's low-budget film, "Raanjhanaa". The company also released some other successful movies like "Yeh Jawaani Hai Deewani" (overseas rights) and "Go Goa Gone" (which enjoyed average success) during the quarter. FY2014E to be better than FY2013: The management indicated that FY2014E would be better in terms of the earnings performance after the soft performance of FY2013 (when the company's revenues had grown by 13% and net profit had grown by 4.7%). The optimism was driven by some big-ticket releases in FY2014 ("Kochadaiyaan", "Ram Leela" and "Rambo Rajkumar" among others) and the company's proven track record of making high-margin low-budget movies (the recent hit "Raanjhanaa", coming up "Bajate Raho"). EIML has some key movies lined up for release in FY2014 like "Kochidayaan", which is expected to be released around Diwali. The company has already begun the process of monetising its key movie, "Kochidayaan" (the company has sold its satellite and music rights), and has received a very healthy response to the movie's distribution rights as well. The company is confident of releasing all its key films on schedule in FY2014. Further, it has planned to spend Rs700 crore in FY2014 out of which Rs150 crore will be on content. With the increasing penetration of the Internet (on PCs and mobile), the advent of the 4G technology and the partnership with Viacom 18's Colors channel, the company expects the monetisation of its film library to improve gradually in FY2014E and FY2015E.  Valuation: In the last six months EIML's stock price has corrected by close to 34%, led by a weak quarterly performance and delays in the planned release of the big movie "Kochadaiyaan". Further, the lower disclosure level of the company's financials has also led to apprehension among investors. The management has assured that after the New York Stock Exchange (NYSE) listing of Eros Plc. (some time in October-November 2013), the disclosure level will improve significantly. The management expects advances of close to Rs1,000 crore to come to EIML from Eros Plc. (parent) after the listing on the NYSE. With earnings improvement on cards and the company's strategy on low-budget high-margin movies turning to be successful, we expect the stock's performance to follow suit. At the current level the stock is trading at an inexpensive valuation of 6x FY2015E earnings. We reiterate our Buy recommendation on EIML with a price target of Rs240 for a 12-month time frame.     SECTOR UPDATE Insurance  Slowdown persists The growth in the annual premium equivalent (APE) of the life insurance industry declined for the eleventh consecutive month in May 2013 as it declined by 23.6% year on year (YoY). This was largely contributed by the Life Insurance Corporation of India (LIC), which showed a decline of 32.0% YoY in the APE. On the other hand, the private players reported a decline of 7.2% YoY in May, with Aviva Life (down 42.5% YoY), HDFC Life (down 38.1% YoY) and Birla Sun Life (down 31.2% YoY) posting the steepest decline in the APE. However, Reliance Life Insurance (Reliance Life; up 165.5% YoY) and Kotak Life Insurance Company (Kotak Life; up 138.1% YoY) posted a significant increase in the APE on a year-on-year (Y-o-Y) basis. On a year-to-date (YTD) basis (April 2013-May 2013), the private players fared relatively better as their APE declined by mere 4.1% YoY as compared with a 28.9% Y-o-Y decline by the LIC and a 21.1% Y-o-Y decline by the industry. The growth (April 2013-May 2013) in the APE of the private players was mainly led by players like Kotak Life (up 100.9% YoY) and Reliance Life (up 88.8% YoY). Max Life Insurance (Max Life) also reported a healthy growth of 15.6% YoY in its APE. On a month-on-month (M-o-M) basis, the APE for industry grew by 28.5% with the private players and LIC showing a growth of 51.9% and 16.1% respectively. On an M-o-M basis, mere eight out of the 24 players posted a decline in their APE. Companies like Tata AIA Life Insurance Company (Tata AIA), MetLife and Max Life reported a decline of 15.6%, 10.4% and 8.3% respectively in their APE. The market share of the private players in May 2013 improved by ~725 basis points to 41.0% (LIC, 59.0%) compared with 33.8% in May 2012. During the period under review, the companies like Reliance Life, Kotak Life and Max Life turned out to be major gainers as their market share improved by ~440, 190 and 85 basis points respectively. Outlook Slowdown persists in the sector and it's been almost a year since the sector has seen a positive growth (Y-o-Y basis). Compared with a growth expectation of about 10% at the beginning of the fiscal, we now expect the premium growth to be flattish in FY2014. The IRDA is likely to come up with guidelines on bankassurance over the next couple of months, which could help the sector. Besides that, the transition towards the newer regulations (proposed for traditional products) will continue to impact the premium growth.    Click here to read report: Investor's Eye   Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.

Fw: ValueGuide: The "R" factor

 

 

Sharekhan ValueGuide [July 08, 2013]  Sharekhan www.sharekhan.com

Summary of Contents    EQUITY FUNDAMENTALS THE STOCK IDEAS REPORT CARD FROM SHAREKHAN'S DESK The "R" factor  The rupee crossed the psychological mark of 60 against the dollar last month. The local currency's fall to an all-time low was largely driven by the strengthening of the US Dollar against all the other major currencies. But the currencies of countries with relatively a high current account deficit, like India, South Africa and Mexico, were among the worst affected globally. On the other hand, the currencies of countries with a current account surplus, like Indonesia and Singapore, managed to sail through with a limited damage. MARKET OUTLOOK It's more global than local this time around  Volatility picks up as Ben pulls the plug and cues turn negative in China, Europe: The unexpected move by the US Federal Reserve to begin tapering of the monetary stimulus under the quantitative easing (QE) programme jolted the financial markets globally. As part of the knee-jerk reaction to the Fed's statement a scramble began for unwinding of the leveraged dollar carry trades which perked up the bond yields, strengthened the dollar and led to the withdrawal of money from risky assets. India also suffered its share of collateral damage with the sudden outflow of $7.5 billion from the Indian debt market and the freefall of the rupee beyond the important psychological barrier of Rs60 to the dollar. The deterioration in the Chinese economic data and the re-emergence of issues in some of the troubled European nations added to the uncertainty in the equation. Rupee dives but creates room for radical policy moves: The global uncertainty and the steep depreciation in the rupee have galvanised the government into taking policy decisions on some pending critical issues. The cabinet committee has approved the new gas price formula that makes investment in oil & gas exploration much more attractive, taken steps to address the availability of coal for the power sector and is looking at hiking foreign direct investment (FDI) limits in certain sectors. Therefore, by hiding behind the compelling circumstances and due to the growing differences within the opposition parties the government may be able to push some pending bills in the forthcoming parliamentary session. Though the government has passed the food bill ordinance, hopefully the pressure on the rupee would act as a grim reminder to the government to maintain fiscal prudence rather than focus on giveaways under social schemes during the election year. RBI to retain cautious monetary stance; corporate earnings to remain muted: Despite the moderation in the inflation rate, the Reserve Bank of India (RBI) is likely to retain its cautious view in the light of the inflationary pressures resulting from the rupee's depreciation. We do not expect it to cut the key policy rates or take any measure to ease liquidity during the policy review meet at the end of July. Thus, the cyclical uptick in the economy could be more sluggish than expected or get delayed due to the uncertainty caused by external factors. The earnings season would be rather lacklustre with the expectations of a marginal decline in the cumulative earnings of the Sensex in Q1 of FY2014 and the growing risk of further downgrades in the FY2014 earnings estimates.  Nifty likely to fluctuate in a broader range: The global events pushed the market towards the lower end of its multi-month trading range of 5600-6100; however, the benchmark indices are stabilsing after the initial knee-jerk reaction. In the immediate term, the continued pressure on the rupee remains the key risk to inflation, might delay monetary easing by the RBI and put further stress on already stretched corporate balance sheets. However, the valuation is quite reasonable with a one-year forward price/earnings (PE) multiple of 13.8x, which is at 5% discount to the long-term average valuation of the Sensex. Consequently, the benchmark indices are likely to consolidate within a broad range though with increase in volatility.  SHAREKHAN TOP PICKS Sharekhan Top Picks  STOCK UPDATES Eros International: Media Price target reduced to Rs240 Gateway Distriparks: Norwest Venture Partners to invest in Snowman Logistics Godrej Consumer Products: Management interaction note HCL Technologies: Upgraded to Buy with increased price target of Rs900 Hindustan Unilever: Book some profits, Hold from long-term perspective ICICI Bank: Annual report review  IL&FS Transportation Networks: Environment ministry clears 3 road projects Ipca Laboratories: Price target revised to Rs675 Mahindra & Mahindra: M&M to consolidate automotive component business Persistent Systems: Upgraded to Buy Pratibha Industries: Muted execution and higher interest expenditure dent earnings Raymond: Annual report review Reliance Industries: Refining margin to correct; petchem margin to improve in the quarter coming ahead Selan Exploration: Technology Budget for development activities approved; retain Buy State Bank of India: Annual report review - Price target revised to Rs2,450 Sun Pharmaceutical Industries: Upgraded to Buy post-correction with revised price target of Rs1,120  Tata Consultancy Services: TCS reiterates FY2014 will be better than FY2013 United Phosphorus: Annual report review  Unity Infraprojects: Price target revised to Rs57 Zee Entertainment Enterprises: New advertising directive to hit ad volumes, phased rates hikes to counter the move SHAREKHAN SPECIAL Currency impact Q1FY2014 Banking earnings preview Monthly economy review SECTOR UPDATES FMCG: Prices of key inputs remain stable; freebies galore Real Estate: Tough environment; be selective  VIEWPOINT Puravankara Projects: Banking on Bangalore market Titan Industries: New regulation alters business model   EQUITY TECHNICALS    Sensex: Final leg up  EQUITY DERIVATIVES    Derivative view: Bulls high on spirit  COMMODITY FUNDAMENTALS    Macro-economy Crude oil: Geopolitical risk premium the main driver  Bullion: Downside pressure to continue Base metals: Likely to move higher on bargain buying, US data Major economic events in July 2013   COMMODITY TECHNICALS    Buy gold on dips Silver has channel supports  Crude oil sees larger distribution Downside potential intact in copper Fresh opportunity for bears in nickel Turmeric poised for a fall  CURRENCY FUNDAMENTALS    Rupee hammered by broad-based dollar strength  INR-USD CMP: Rs60.18 (spot) INR-GBP CMP: Rs90.77 (spot) INR-EUR CMP: Rs77.64 (spot) INR-JPY CMP: Rs60.20 (spot)   CURRENCY TECHNICALS    USD-INR: Pit stop GBP-INR: Cushion for bulls EUR-INR: Bulls gathering strength  JPY-INR: Sub-division on the way up  PMS DESK Sharekhan PMS funds: Fund manager's view and product performance ProPrime-Top Equity ProPrime-Diversified Equity ProTech-Diversified ProTech-Nifty Thrifty ProTech-Trailing Stops  ADVISORY DESK    Monthly performance of Advisory products MID Trades Derivative Ideas  MUTUAL FUNDS DESK  MF PICKS Sharekhan's top mutual fund picks (equity)  Sharekhan's top SIP fund picks  EARNINGS GUIDE Click here to read report: Sharekhan ValueGuide   Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.

Fw: Investor's Eye: Market Outlook - It's more global than local this time around; Special - Q1FY2014 Cement earnings preview, Q1FY2014 Capital Goods & Engineering earnings preview

 

 

Investor's Eye [July 05, 2013]  Sharekhan www.sharekhan.com

Summary of Contents     MARKET OUTLOOK It's more global than local this time around Benchmark indices are likely to consolidate in a broader range Volatility picks up as Ben pulls the plug and cues turn negative in China, Europe: The unexpected move by the US Federal Reserve to begin tapering of the monetary stimulus under the quantitative easing (QE) programme jolted the financial markets globally. As part of the knee-jerk reaction to the Fed's statement a scramble began for unwinding of the leveraged dollar carry trades which perked up the bond yields, strengthened the dollar and led to the withdrawal of money from risky assets. India also suffered its share of collateral damage with the sudden outflow of $7.5 billion from the Indian debt market and the freefall of the rupee beyond the important psychological barrier of Rs60 to the dollar. The deterioration in the Chinese economic data and the re-emergence of issues in some of the troubled European nations added to the uncertainty in the equation. Rupee dives but creates room for radical policy moves: The global uncertainty and the steep depreciation in the rupee have galvanised the government into taking policy decisions on some pending critical issues. The cabinet committee has approved the new gas price formula that makes investment in oil & gas exploration much more attractive, taken steps to address the availability of coal for the power sector and is looking at hiking foreign direct investment (FDI) limits in certain sectors. Therefore, by hiding behind the compelling circumstances and due to the growing differences within the opposition parties the government may be able to push some pending bills in the forthcoming parliamentary session. Though the government has passed the food bill ordinance, hopefully the pressure on the rupee would act as a grim reminder to the government to maintain fiscal prudence rather than focus on giveaways under social schemes during the election year. RBI to retain cautious monetary stance; corporate earnings to remain muted: Despite the moderation in the inflation rate, the Reserve Bank of India (RBI) is likely to retain its cautious view in the light of the inflationary pressures resulting from the rupee's depreciation. We do not expect it to cut the key policy rates or take any measure to ease liquidity during the policy review meet at the end of July. Thus, the cyclical uptick in the economy could be more sluggish than expected or get delayed due to the uncertainty caused by external factors. The earnings season would be rather lacklustre with the expectations of a marginal decline in the cumulative earnings of the Sensex in Q1 of FY2014 and the growing risk of further downgrades in the FY2014 earnings estimates.  Nifty likely to fluctuate in a broader range: The global events pushed the market towards the lower end of its multi-month trading range of 5600-6100; however, the benchmark indices are stabilsing after the initial knee-jerk reaction. In the immediate term, the continued pressure on the rupee remains the key risk to inflation, might delay monetary easing by the RBI and put further stress on already stretched corporate balance sheets. However, the valuation is quite reasonable with a one-year forward price/earnings (PE) multiple of 13.8x, which is at 5% discount to the long-term average valuation of the Sensex. Consequently, the benchmark indices are likely to consolidate within a broad range though with increase in volatility.  SHAREKHAN SPECIAL Q1FY2014 Cement earnings preview  Earnings to contract in Q1 on early monsoon Key points Expect weak performance in Q1: During Q1FY2014, the earnings growth of the cement companies would be dented due to a sluggish demand environment, an early arrival of monsoon and the continued cost pressure on the margin. Hence, the cumulative earnings of Sharekhan's cement universe are expected to decline by 32.5% on an annual basis. Among the companies under Sharekhan's cement universe, the south-based companies like India Cements and Madras Cements are expected to witness a relatively higher pressure on earnings. Sluggish demand; weak volume offtake: On account of a slower than expected execution of infrastructure projects and an early arrival of monsoon, the volume offtake during Q1FY2014 was weak and is unlikely to support the revenue growth of the cement companies. The cumulative revenues of the Sharekhan's cement universe are expected to largely remain flat on a year-on-year (Y-o-Y) basis. On the volume front, UltraTech Cement (UltraTech) and Shree Cement are expected to post a degrowth in the volume of 1-8%. On the other hand, the south-based companies are expected to post a volume growth of 4-13% on account of a low base effect. Further, the non-cement businesses like construction in case of Jaiprakash Associates (JP Associates), viscose staple fibre (VSF) in Grasim Industries (Grasim) and power in Shree Cement will offset the negative impact of a muted volume growth and a lower realisation in the cement division. Average realisation largely remained flat on a Q-o-Q basis: Given the sluggish demand environment and an increase in the supply from the new capacity, the cement prices corrected in April-May in most parts of the country. However, in June, there was a recovery, which makes the average cement realisation for Q1FY2014 flat or a marginal decrease on a quarter-on-quarter (Q-o-Q) basis. Among the various regions, the eastern and southern regions witnessed an increase in the realisation on a sequential basis. On the other hand, the average cement prices in the western, central and northern regions corrected marginally during Q1FY2014. We estimate the average cement realisation in Q1FY2014 to be lower by around Rs150-180/tonne on a Y-o-Y basis for the companies under our coverage. Outlook and top pick: Given the poor demand environment, we believe the volume growth will be unable to support the revenue growth of the cement companies in FY2014. Further, the sustainability of the cement prices is a key risk going ahead in anticipation of an increase in the supply through stabilisation of the new capacities. In addition to this, the cost pressure in terms of higher freight charges continues to keep the margin under pressure. However, from H2FY2014 we expect a recovery in the demand environment through faster approvals of infrastructure projects and a likely increase in the government spending. Hence, we maintain our neutral view on the cement sector but we are positive on selective pick. In the large-sized space, we prefer UltraTech due to its strong balance sheet, pan-India presence and recent correction in the stock price. Among the mid-sized companies, we like Orient Cement (the demerged arm of Orient Paper & Industries), which is yet to be listed.    Q1FY2014 Capital Goods & Engineering earnings preview  Bottom line trend diverging from top line; profitability concern remains Key points Double-digit top line growth YoY (excluding BHEL) In Q1FY2014, we expect our coverage companies (excluding BHEL) to witness a double-digit top line growth in Q1FY2014 (year on year [YoY]). We believe the revenues of Bharat Heavy Electricals Ltd (BHEL) will continue to decline (as witnessed in the last few quarters) on account of a sluggish order inflow trend. We expect ~5% year-on-year (Y-o-Y) decline in the revenues of BHEL in Q1FY2014. Larsen & Toubro (L&T), Thermax, Kalpataru Power Transmission Ltd (KPTL) and Crompton Greaves Ltd (CGL) are likely to deliver a revenue growth of around 10-12% YoY in Q1FY2014. On a low base, V-Guard Industries (V-Guard) is expected to grow at 21% YoY in this period. We expect our coverage universe to witness a sales decline of 41% quarter on quarter (QoQ). Traditionally in the capital goods sector, the conversion of revenues remains highest in the last quarter of the year; hence, the sequential comparison is not fair. Margin pressure continues; operating profit a mixed bag The operating profit margin (OPM) of our coverage universe is expected to remain under pressure both on Y-o-Y and quarter-on-quarter (Q-o-Q) bases, given the current environment. Among the universe, CGL and V-Guard are expected to see a significant margin contraction of around 241 basis points YoY and 347 basis points YoY respectively. Given the post-restructuring process of one of its European plant, GCL's OPM is expected to remain subdued on a Y-o-Y basis. V-Guard is also likely to witness margin pressure on account of higher advertisement expenses (in line with Q4FY2013). L&T, KPTL and Thermax are expected to maintain the OPM level at around 9%, 10% and 10% respectively. The operating profit of our coverage universe is expected to be flat, while excluding BHEL, the growth is estimated at 8% YoY. Below operating line, higher interest cost could tab net profit growth The net profit growth of our universe is expected to decline by 5% YoY in Q1FY2014 on a flat operating profit growth, due to the higher interest cost. The cumulative interest cost of our coverage universe is likely to go up by 14% YoY during this period on a flat operating profit growth. On an absolute basis, the decline in BHEL's operating profit could drag the overall profit of the pack. Following that, CGL is likely to witness a significant fall (59% Y-o-Y decline) in the net profit. The profit after tax (PAT) of V-Guard is also expected to decline by 29% YoY on lower OPM. L&T and Thermax are expected to record a net profit growth of 7-9% YoY each while that of KPTL is expected to decline by 8% YoY. We expect the PAT of our universe to decline sharply due to seasonality of higher execution or revenue translation in Q4. However, V-Guard and CGL are expected to reverse the trend as they are estimated to recover from an abysmally low OPM in Q4FY2013. Healthy order flow observed but book-to-bill ratio still remains low Amidst bleak environment, the order inflow showed a very healthy growth of 36% sequentially to Rs31,424 crore. Though the order inflow in this quarter declined by 13% YoY, on an absolute basis the order inflow size was respectably high in the last eight quarters. Also, in Q1FY2013, the order inflow was highest compared with any quarter in the last two years. While the healthy order inflow springs some hope of revival but it is not prudent to consider it as a trend. Further, the current book-to-bill ratio of our coverage companies remains at a historically low level. The recent initiative of Cabinet Committee on Economic Affairs (CCEA), like allowing power producers to pass on higher cost of imported coal and pushing fast-track approval for selected large projects, could help the investment cycle to restart. Further, the progress in fuel supply agreement (FSA) issue of Coal India with various power generators could be another catalyst for the whole power sector. The series of development done recently in the stalled power sector may possibly churn the wheels of investments in the near future. Nevertheless, any meaningful cut in the interest rate could also be an important trigger for the sector. Click here to read report: Investor's Eye